November 14, 2018

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Why German Trucks May Become a Target for Activist Investors

Why German Trucks May Become a Target for Activist Investors
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Volkswagen and Daimler are both inching toward separating out their truck businesses — but they may find themselves rattled by opinionated shareholders in the process.

The move to separate out the truck businesses from their parent companies seems like a good idea, as investors tend not to ascribe much value to them inside the sprawling carmakers. But the way VW and Daimler go about setting these operations free could bring activist investors to their doorsteps.

The corporate finance logic runs like this. At 13 times forecast operating profit — which is the multiple that rival truck makers Paccar and Volvo currently trade at — the VW and Daimler truck divisions would be worth 65 billion euros (around $77 billion), including debt, based on estimates from the investment banking advisory firm Evercore. Assuming that the parents, which sport a combined market value of 132 billion euros, keep their current lowly multiples of around four times operating profit, the two companies would be worth 43 billion euros more than their parents fetch today, according to calculations made by Breakingviews.

But the companies risk squandering that opportunity. VW is planning a partial listing of its MAN and Scania brands, which would continue to handcuff them to its governance-challenged parent. With the automaker still calling the shots, the listed company would still effectively be part of the VW conglomerate — and hardly deserve a premium valuation. For Daimler, following the path of its rival would doom that business to a similar fate.

The better option is to give the companies independence by spinning them off directly to shareholders. Fiat Chrysler did this with Ferrari, by first launching an initial public offering of 10 percent and then handing the remainder over to investors. The sports car company’s stock has nearly tripled in value since. While a similar transaction would still leave VW’s truck unit with many traditionalist owners, like the state of Lower Saxony, at least it would have a freer hand in charting its future.

German companies, particularly automakers like VW, rarely take the lead in pursuing the best practices of corporate governance — it’s not easy when, by law, unions have a big say in the boardroom. But that is changing: The nation’s industrial engineering and steel conglomerate ThyssenKrupp recently said it would split into two.

Of course, that took pressure from the activist investors Elliott and Cevian Capital. VW and Daimler would be wise to study that case.

Liam Proud is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

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